P L D 1959 Supreme Court (Pak (PLP)

AMIRUDDIN AHMAD, J.‑This is a certificated appeal from the judgment and order of the High Court of West Pakistan at Lahore, dated the 6th February 1957 and it arises out of a reference made at the instance of the appellants under section 66 (1) of the Income‑tax Act by the Income‑tax Tribunal. The Tribunal by their order dated the 19th June 1953, referred the following question to the High. Court for its opinion:‑ "Whether in the circumstances of the case, the application of assessee firm for registration under section 26‑A was rightly refused on the ground that the shares of the individual partners constituting the assessee firm were not specified in the instrument of partnership, dated the 10th of March 1951, which was sought to be registered?" The circumstances consist of the following facts as contained in the statement of the case made by the Tribunal and the docu ments referred to therein, about which there is no controversy:‑ Two comparatively smaller firms were running cotton ginning business factories. These were S. A. Rahim and Company and Haji Maula Bakhsh, Muhammad Sharif, the latter having their factory at Chak Jhumra in the district of Lyallpur. The firm of S. A. Rahim and Company was doing business under an instrument of partnership, dated the 5th November, 1949, which expired after one year. The firm Haji Maula Bakhsh Muhammad Sharif started cotton ginning and pressing business some time in December 1947, and later an instrument of partnership was executed by its partners on the 24th January, 1948. S. A. Rahim and Company was reconstituted under an instrument of partnership, dated the 6th December 1950, when a half share of an evacuee cotton factory of Dhanpat Mat Bhagwan Das situated at Chichawatni in the District of Montgomery was allotted to them. The other half share was allotted to the firm of Haji Maula Bakhsh Muhammad Sharif. The firm of S. A. Rahim and Company consisted of three partners, namely, S. A. Rahim, Nisar Ahmad and Muhammad Rafiq, each of whom had a one‑third share in the business done by that partnership, while the firm of Haji Maula Bakhsh Muhammad Sharif, under the instrument, dated the 24th January 1948, consisted of nine share‑holders, whose shares in the business ranged from four annas to one anna, that of Muhammad Sharif, who later executed the deed of 10th March 1951, being two annas. After the allotment of half share each to the above two firms of the cotton factory of Dhanpat Mal Bhagwan Das at Chichawatni in the District of Montgomery, the two firms entered into a bigger partnership, under an instrument of partnership, dated the 10th March 1951, for running the said factory jointly. In the instrument it was provided that half the share of the capital will be contributed by the first party, namely, S. A. Rahim and Company and the other half by the second party, namely, Haji Maula Bakhsh Muhammad Sharif, that the firm's name of the bigger partnership was to be the United Cotton Factory and that both the parties would actually be entitled to profit and bear loss as previously. Besides this, there is no specification of shares of any individual having share in the bigger partnership, viz., the United Cotton Factory now consisting altogether of twelve persons. The said instrument of partnership of the bigger firm of the United Cotton Factory was executed by two persons only, namely, S. A. Rahim and Muhammad Sharif, the former signed his own name in his individual capacity, while the latter signed for Haji Maula Bakhsh Muhammad Sharif. It was witnessed by two persons, who were not partners of either firm. It is this instrument of partnership dated the 10th March 1951, with which we are concerned in the present case. It was registered at the instance of the firm by the Income‑tax Officer, B Ward, Lahore, in the previous year, but when an application was filed for the renewal of the registration of the bigger firm under section 26‑A for the year 1951‑52, the Income‑tax Officer refused to register it on the main ground that there was no specification of the shares of the individual partners of the smaller firms in the bigger firm and therefore he could not grant registration. Against the order of the Income‑tax Officer refusing registration an appeal was taken to the Appellate Assist ant Commissioner of Income‑tax by the two firms. The Appellate Assistant Commissioner of Income‑tax, on a misconception of the points really involved in the case and after passing an undeserved stricture on the Income‑tax Officer, set aside the Income‑tax Officer's order and directed the registration of the firm. Against the said order of the Appellate Assistant Commissioner, the Income‑tax Officer preferred an appeal to the Income‑tax Appellate Tribunal Pakistan, who after fully going through the case and relying on the case of M. Kannappa, Naicker and Co. v. Commis sioner of Income‑tax, Madras, ((1937) 5 I T R 49) allowed the appeal, set aside the order of the Appellate Assistant Commissioner and restored that of the Income‑tax Officer. Upon this, the assessee made an application for a reference to the High Court under section 66 (1) of the Income‑tax Act of the question of law arising out of its order. The question, which has been reproduced earlier, was answered by the High Court in the affirmative. The assessee now after obtaining a certificate from the High Court has come up on appeal to us against the High Court's order. It was argued in support of this appeal that the High Court was in error in upholding the order of the Income‑tax Officer on the ground that in the deed of the bigger partnership no individual shares were specified. It was submitted that a partnership may be constituted by more than one document, and inasmuch as the shares of the individual partners of the two component firms were separately ascertainable from the other two partnership deeds, read along with the instrument dated the 10th March 1951, the Income‑tax Officer was not justified in refusing registration and the High Court in upholding the same and answering the question in the affirmative. We are unable to accept this contention. In fact, it is evident from the order of the Income‑tax Officer that only the deed of partnership of Haji Maula Bakhsh Muhammad Sharif and that of the bigger partnership were produced before him. Even this deed of partnership of Haji Maula Bakhsh Muhammad Sharif related to a ginning factory at Chak Jhumra and not to the Chichawatni factory, with which we are concerned in this case. The Income‑tax Officer evidently followed the instructions laid down in Part III of the Income‑tax Manual containing `Notes on the Indian Income‑tax Act, 1922, the rules made under that Act and other Statutory Provisions and order concerned with the imposition of income‑tax.' The instructions are as follows:‑ "A firm cannot legally enter into partnership with another firm. It does not, however, follow that because a firm is not a partner in another firm yet what is described as its share in the profits of such firm is not its income. Although a firm cannot legally enter into partnership with another firm yet when two firms do enter into a larger partnership the larger partnership will be treated as one constituted by the members the two firms. If registration is applied for by the larger partnership, it would be allowed provided the firms entering into partnership are also constituted under instruments of partnership specifying the individual shares of partners." These instructions are evidently based on a number of decided cases both in India and England, for example, the case of Seodoyal Khemka v. Joharmull Manmull (1923 I L R 50 Cal. 549), approved in the case of Brojo Lal Saha Banikya v. Budh Nath Pyarilal & Co., (1928 I L R 55 Cal. 551), the case of Ex parte Blain in re Sawers, (1879 12 Ch. D 522 at 533) the case of Sadler v. Whiteman and another (1910 1 K B 888 at 889), the case of Chandrika Prasad Ram Swarup v. Com missioner of Income‑tax, U. P. & C. P., (7 I T R 1939 p. 269) a Full Bench decision C of the Allahabad High Court, and the case of Messrs Jai Dayal Madan Gopal of Benares in re (A I R 1933 All. 77). We need not consider here the question whether under the Partnership Act a firm can legally enter into a partnership with another firm. But it is sufficient for our purpose to hold that for the purposes of the Income‑tax Act the individual partners constituting the component firms will be treated as partners of the bigger firm, but unless the individual A shares of the partners are specified, and by implication, names mentioned in the instrument of bigger partnership, it cannot be registered under section 26‑A of the Income‑tax Act. Under the Income‑tax Rules, 1922, made under powers given to the Central Board of Revenue under section 59 of the Income‑tax Act, which under subsection (5) of that section has the same effect 'as if they were enacted in the Act, and which were in force at the time of the application for registration, it was provided as follows:‑ "

2. Any firm constituted under an Instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26‑A of the Indian Income‑tax Act, 1922, (hereinafter in these rules referred to as the Act), register with the Income‑tax Officer, the particulars contained in the said Instrument on application made in this behalf." Section 26‑A is as follows: "26‑A. Procedure in registration of firms.‑(I) Application maybe made to the Income‑tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the pur poses of this Act and of any other enactment for the time being in force relating to income‑tax or super‑tax. (2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be dealt with by the Income‑tax Officer to such manner as may be prescribed." So under the provisions of section 26A and Rule 2, it was essential that the document required to be registered must on the face of it specify the individual shares of the partners and these should be not of the component firms but individuals having a share in it. Though these rules underwent some changes in April 1952 and in August 1954, the provisions requiring these essentials are the same. The instrument of bigger partnership in the present case neither contained the names, nor specified shares of the twelve individual partners of the two component firms. The instrument, therefore, was not in accordance with the terms of section 26‑A and Rule 2 aforesaid and the registration was rightly rejected. The individual shares in the new bigger partnership cannot be legitimately inferred from their shares in the smaller concerns when they are not mentioned in the new instrument. This instrument of partnership also suffers from another infirmity, which does not make it a genuine partnership between the individual partners of the two component firms. The docu ment dated the 10th March 1951, as already stated before, has been executed by only two persons, one signing on his own behalf alone and other signing for his firm, although according to section 18 of the Pakistan Partnership Act of 1932, a partner is the agent of the firm for the purpose of the business of the firm subject to the provisions of this Act, Section 19 (2) (h) clearly lays down: "(2) In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to (h) enter into partnership on behalf of the firm." There is nothing to show that these two partners of the smaller firms were authorised by the other partners to enter into a new venture on their behalf or to fix their shares in it. So on the face of it the instrument of the bigger partnership executed by one partner each of the two firms does not bind the two other partners of the one firm and eight others of the other firm to enter into a common partnership, the genuineness of which was also doubted by the Tribunal. The High Court was, therefore, right in answering the question of law in the affirmative, and the appeal is accordingly dismissed with costs. A. H. Appeal dismissed.